Professional Documents
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RELEVANT COSTING
MULTIPLE CHOICE
1.
ANSWER:
2.
a future cost.
avoidable.
sunk.
a product cost.
ANSWER:
EASY
ANSWER:
4.
EASY
3.
EASY
Which of the following is the least likely to be a relevant item in deciding whether to
replace an old machine?
a.
b.
c.
d.
ANSWER:
EASY
121
122
5.
Chapter 12
a sunk cost.
a future cost.
a variable cost.
an incremental cost.
ANSWER:
6.
EASY
ANSWER:
EASY
ANSWER:
8.
7.
Relevant Costing
EASY
A cost is sunk if it
a.
b.
c.
d.
ANSWER:
EASY
Chapter 12
9.
Relevant Costing
sunk costs
incremental costs
fixed costs
prime costs
ANSWER:
10.
sunk costs
yes
yes
no
yes
ANSWER:
EASY
historical costs
yes
no
no
yes
allocated costs
no
no
yes
yes
EASY
In deciding whether an organization will keep an old machine or purchase a new machine,
a manager would ignore the
a.
b.
c.
d.
ANSWER:
12.
11.
123
EASY
ANSWER:
EASY
124
13.
Chapter 12
The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is
a.
b.
c.
d.
ANSWER:
14.
Variable
costs
no
yes
no
yes
ANSWER:
EASY
Avoidable fixed
costs
yes
no
no
yes
Unavoidable fixed
costs
yes
yes
yes
no
EASY
ANSWER:
16.
a.
b.
c.
d.
15.
Relevant Costing
EASY
Prime costs
yes
yes
yes
no
ANSWER:
Sunk costs
yes
no
no
no
EASY
Incremental costs
yes
yes
no
yes
Chapter 12
17.
Relevant Costing
ANSWER:
18.
EASY
ANSWER:
EASY
When a scarce resource, such as space, exists in an organization, the criterion that should
be used to determine production is
a.
b.
c.
d.
ANSWER:
20.
Which of the following qualitative factors favors the buy choice in a make or buy decision
for a part?
a.
b.
c.
d.
19.
125
EASY
ANSWER:
EASY
126
21.
Chapter 12
The minimum selling price that should be acceptable in a special order situation is equal to
total
a.
b.
c.
d.
production cost.
variable production cost.
variable costs.
production cost plus a normal profit margin.
ANSWER:
22.
EASY
direct labor
equipment depreciation
variable cost of utilities
opportunity cost of production
ANSWER:
EASY
ANSWER:
24.
Which of the following costs is irrelevant in making a decision about a special order price
if some of the company facilities are currently idle?
a.
b.
c.
d.
23.
Relevant Costing
EASY
ANSWER:
MEDIUM
Chapter 12
25.
Relevant Costing
ANSWER:
26.
EASY
ANSWER:
EASY
For a particular product in high demand, a company decreases the sales price and
increases the sales commission. These changes will not increase
a.
b.
c.
d.
sales volume.
total selling expenses for the product.
the product contribution margin.
the total variable cost per unit.
ANSWER:
28.
Assume a company produces three products: A, B, and C. It can only sell up to 3,000
units of each product. Production capacity is unlimited. The company should produce the
product (or products) that has (have) the highest
a.
b.
c.
d.
27.
127
EASY
An increase in direct fixed costs could reduce all of the following except
a.
b.
c.
d.
ANSWER:
EASY
128
29.
Chapter 12
When a company discontinues a segment, total corporate costs may decrease in all of the
following categories except
a.
b.
c.
d.
ANSWER:
30.
EASY
ANSWER:
EASY
K Co. uses 10,000 units of a part in its production process. The costs to make a part are:
direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead,
$30. K Co. has received a quote of $55 from a potential supplier for this part. If K Co.
buys the part, 70 percent of the applied fixed overhead would continue. K Co. would
be better off by
a.
b.
c.
d.
ANSWER:
32.
31.
Relevant Costing
MEDIUM
P Co. has only 25,000 hours of machine time each month to manufacture its two products.
Product X has a contribution margin of $50, and Product Y has a contribution margin of
$64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of
machine time. If P wants to dedicate 80 percent of its machine time to the product that
will provide the most income, P will have a total contribution margin of
a.
b.
c.
d.
$250,000.
$240,000.
$210,000.
$200,000.
ANSWER:
DIFFICULT
Chapter 12
33.
Relevant Costing
129
Down Co. has 3 divisions: R, S, and T. Division Rs income statement shows the following
for the year ended December 31, 2001:
Sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
Net loss
$1,000,000
(800,000 )
$ 200,000
$100,000
250,000
(350,000 )
$ (150,000 )
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60
percent are avoidable if the division is closed. All of the selling expenses relate to the
division and would be eliminated if Division R were eliminated. Of the administrative
expenses, 90 percent are applied from corporate costs. If Division R were eliminated,
Down Co. income would
a.
b.
c.
d.
increase by $150,000.
decrease by $ 75,000.
decrease by $155,000.
decrease by $215,000.
ANSWER:
34.
MEDIUM
Sandow Co. is currently operating at a loss of $15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for $35 per unit. Costs
associated with the product are: direct material, $6; direct labor, $10; variable overhead,
$3; applied fixed overhead, $4; and variable selling expenses, $2. The special order would
allow the use of a slightly lower grade of direct material, thereby lowering the
price per unit by $1.50 and selling expenses would be decreased by $1. If Sandow wants
this special order to increase the total net income for the firm to $10,000, what sales price
must be quoted for each of the 5,000 units?
a.
b.
c.
d.
$23.50
$24.50
$27.50
$34.00
ANSWER:
MEDIUM
1210
35.
Chapter 12
Relevant Costing
Q Co. produces a part that has the following costs per unit:
Direct material
Direct labor
Variable overhead
Fixed overhead
Total
$ 8
3
1
5
$17
Z Corp. can provide the part to Q for $19 per unit. Q Co. has determined that 60 percent
of its fixed overhead would continue if it purchased the part. However, if Q no longer
produces the part, it can rent that portion of the plant facilities for $60,000 per year. Q Co.
currently produces 10,000 parts per year. Which alternative is preferable and by what
margin?
a.
b.
c.
d.
Make$20,000
Make$50,000
Buy$10,000
Buy$40,000
ANSWER:
36.
MEDIUM
Armstrong Co. has 15,000 units in inventory that had a production cost of $3 per unit.
These units cannot be sold through normal channels due to a significant technology
change. These units could be reworked at a total cost of $23,000 and sold for $28,000.
Another alternative is to sell the units to a junk dealer for $8,500. The relevant cost for
Armstrong to consider in making its decision is
a.
b.
c.
d.
ANSWER:
EASY
Chapter 12
Relevant Costing
1211
R Corp. sells a product for $18 per unit, and the standard cost card for the product shows
the following costs:
Direct material
Direct labor
Overhead (80% fixed)
Total
$ 1
2
7
$10
R received a special order for 1,000 units of the product. The only additional cost to R
would be foreign import taxes of $1 per unit. If R is able to sell all of the current
production domestically, what would be the minimum sales price that R would consider
for this special order?
a.
b.
c.
d.
$18.00
$11.00
$5.40
$19.00
ANSWER:
38.
EASY
Assume that R has sufficient idle capacity to produce the 1,000 units. If R wants to
increase its operating profit by $5,600, what would it charge as a per-unit selling price?
a.
b.
c.
d.
$18.00
$10.00
$11.00
$16.60
ANSWER:
MEDIUM
1212
39.
Chapter 12
Relevant Costing
Handy Combs, Inc. makes and sells brushes and combs. It can sell all of either product it
can make. The following data are pertinent to each respective product:
Units of output per machine hour
Selling price per unit
Product cost per unit
Direct material
Direct labor
Variable overhead
Brushes
8
$12.00
Combs
20
$4.00
$1.00
2.00
0.50
$1.20
0.10
0.05
ANSWER:
40.
EASY
Boston Shoe Cobblers has been asked to submit a bid on supplying 1,000 pairs of military
dress boots to the Pentagon. The companys costs per pair of boots are as follows:
Direct material
Direct labor
Variable overhead
Variable selling cost (commission)
Fixed overhead (allocated)
Fixed selling and administrative cost
$8
6
3
3
2
1
Assuming that there would be no commission on this potential sale, the lowest price the
firm can bid is some price greater than
a.
b.
c.
d.
$23.
$20.
$17.
$14.
ANSWER:
EASY
Chapter 12
41.
Relevant Costing
1213
Schoof Company has two sales territoriesNorth and South. Financial information for the
two territories for 2001 follows:
Sales
Direct costs:
Variable
Fixed
Allocated common costs
Net income (loss)
North
$980,000
South
$750,000
(343,000)
(450,000)
(275,000 )
$ (88,000 )
(225,000)
(325,000)
(175,000 )
$ 25,000
Because the company is in a start-up stage, corporate management feels that the North
sales territory is creating too much of a cash drain on the company and it should be
eliminated. If North is discontinued, one sales manager (whose salary is $40,000 per year)
will be relocated to the South territory. By how much would Schoofs income change if
the North territory is eliminated?
a.
b.
c.
d.
increase by $88,000
increase by $48,000
decrease by $267,000
decrease by $227,000
ANSWER:
MEDIUM
1214
Chapter 12
Relevant Costing
500
10 yrs.
1,000
10 yrs.
sunk cost.
irrelevant cost.
future avoidable cost.
opportunity cost.
ANSWER:
EASY
sunk cost.
future relevant cost.
historical relevant cost.
opportunity cost.
ANSWER:
44.
New machine
$20,000
0
4,000
The $4,000 of annual operating costs that are common to both the old and the new
machine are an example of a(n)
a.
b.
c.
d.
43.
Old machine
$9,000
5,000
9,000
EASY
sunk cost.
future relevant cost.
future irrelevant cost.
opportunity cost.
ANSWER:
EASY
Chapter 12
45.
Relevant Costing
1215
The estimated $500 salvage value of the existing machine in 10 years represents a(n)
a.
b.
c.
d.
sunk cost.
opportunity cost of selling the existing machine now.
opportunity cost of keeping the existing machine for 10 years.
opportunity cost of keeping the existing machine and buying the new machine.
ANSWER:
EASY
7
4
6
10
10,000
9,500
At this time (April 2001), the 2001 model is in production and it renders the 2000 model
radio obsolete. If the remaining 500 units of the 2000 model radios are to be sold through
regular channels, what is the minimum price the company would accept for the radios?
a.
b.
c.
d.
$30
$27
$18
$4
ANSWER:
47.
$30
MEDIUM
Assume that the remaining 2000 model radios can be sold through normal channels or to a
foreign buyer for $6 per unit. If sold through regular channels, the minimum acceptable
price will be
a.
b.
c.
d.
$30.
$33.
$10.
$4.
ANSWER:
MEDIUM
1216
Chapter 12
Relevant Costing
$100
$72
$81
$94
ANSWER:
MEDIUM
Assume, for this question only, that the Chip Division is operating at a level of 70,000
chips per year. What is the minimum price that the division would consider on a special
order of 1,000 chips to be distributed through normal channels?
a.
b.
c.
d.
$78
$95
$100
$81
ANSWER:
50.
100
15
Assume, for this question only, that the Chip Division is producing and selling at capacity.
What is the minimum selling price that the division would consider on a special order of
1,000 chips on which no variable period costs would be incurred?
a.
b.
c.
d.
49.
$50
20
10
MEDIUM
Assume, for this question only, that the Chip Division is presently operating at a level of
80,000 chips per year. Accepting a special order on 2,000 chips at $88 will
a.
b.
c.
d.
ANSWER:
MEDIUM
Chapter 12
Relevant Costing
1217
20,000
10,000
5 yrs.
ANSWER:
EASY
a sunk cost.
an opportunity cost of keeping the old machine.
irrelevant to the equipment replacement decision.
an historical cost.
ANSWER:
53.
New machine
$400,000
The major opportunity cost associated with the continued use of the existing machine is
a.
b.
c.
d.
52.
Existing machine
$200,000
80,000
0
40,000
5 yrs.
EASY
If the company buys the new machine and disposes of the existing machine, corporate
profit over the five-year life of the new machine will be ____________________ than the
profit that would have been generated had the existing machine been retained for five
years.
a.
b.
c.
d.
$150,000 lower
$170,000 lower
$230,000 lower
$150,000 higher
ANSWER:
MEDIUM
1218
54.
Chapter 12
Relevant Costing
Golden, Inc. has been manufacturing 5,000 units of Part 10541, which is used in the
manufacture of one of its products. At this level of production, the cost per unit of
manufacturing Part 10541 is as follows:
Direct material
Direct labor
Variable overhead
Fixed overhead applied
Total
$ 2
8
4
6
$20
Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit.
Golden has determined that it could use the facilities currently used to manufacture Part
10541 to manufacture Part RAC and generate an operating profit of $4,000. Golden has
also determined that two-thirds of the fixed overhead applied will continue even if Part
10541 is purchased from Brown. To determine whether to accept Browns offer, the net
relevant costs to make are
a.
b.
c.
d.
$70,000.
$84,000.
$90,000.
$95,000.
ANSWER:
55.
MEDIUM
Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year at
a variable cost of $750,000 and a fixed cost of $450,000. Based on Relays predictions,
240,000 batons will be sold at the regular price of $5.00 each. In addition, a special order
was placed for 60,000 batons to be sold at a 40 percent discount off the regular price. The
unit relevant cost per unit for Relays decision is
a.
b.
c.
d.
$1.50.
$2.50.
$3.00.
$4.00.
ANSWER:
MEDIUM
Chapter 12
56.
Relevant Costing
1219
Big City Motors is trying to decide whether it should keep its existing car washing
machine or purchase a new one that has technological advantages (which translate into
cost savings) over the existing machine. Information on each machine follows:
Original cost
Accumulated depreciation
Annual cash operating costs
Current salvage value of old machine
Salvage value in 10 years
Remaining life
Old machine
$9,000
5,000
9,000
2,000
500
10 yrs.
New machine
$20,000
0
4,000
1,000
10 yrs.
$11,000.
$20,000.
$13,000.
$18,000.
ANSWER:
EASY
The objective in solving the linear programming problem is to determine the optimal levels
of the
a.
b.
c.
d.
coefficients.
dependent variables.
independent variables.
slack variables.
ANSWER:
58.
EASY
ANSWER:
EASY
1220
59.
Chapter 12
ANSWER:
60.
ANSWER:
EASY
ANSWER:
EASY
ANSWER:
63.
62.
EASY
61.
EASY
The objective function and the resource constraints have the same
a.
b.
c.
d.
dependent variables.
coefficients.
independent variables.
all of the above.
ANSWER:
EASY
Relevant Costing
Chapter 12
64.
Relevant Costing
Which of the following items continuously checks for an improved solution from the one
previously computed?
a.
b.
c.
d.
An algorithm
yes
yes
no
no
ANSWER:
65.
Surplus
yes
yes
no
no
ANSWER:
EASY
Slack
yes
no
yes
no
EASY
Integer
Input-output
Mathematical
Regression
ANSWER:
67.
Simplex method
yes
no
no
yes
Which of the following variables is associated with the less than or equal to constraints?
a.
b.
c.
d.
66.
1221
EASY
The graphical approach to solving a linear programming problem becomes much more
complex when there are more than two
a.
b.
c.
d.
constraints
yes
no
yes
no
ANSWER:
decision variables
no
yes
yes
no
EASY
1222
68.
Chapter 12
Relevant Costing
The feasible region for a graphical solution to a profit maximization problem includes
a.
b.
c.
d.
ANSWER:
EASY
4,200
3,000
600
1,400
ANSWER:
70.
MEDIUM
ANSWER:
71.
MEDIUM
Constraint 1.
Constraint 2.
both constraints.
neither constraint.
ANSWER:
EASY
Chapter 12
72.
Relevant Costing
1223
ANSWER:
73.
EASY
Consider the following linear programming problem and assume that non-negativity
constraints apply to the independent variables:
Max CM = $14X + $23Y
Subject to
Constraint 1: 4X + 5Y < 3,200
Constraint 2: 2X + 6Y < 2,400
Which of the following are feasible solutions to the linear programming problem?
a.
b.
c.
d.
X = 600, Y = 240
X = 800, Y = 640
X = 0, Y = 400
X = 1,200, Y = 0
ANSWER:
74.
MEDIUM
Contracting with vendors outside the organization to obtain or acquire goods and/or
services is called
a.
b.
c.
d.
target costing.
insourcing.
outsourcing.
product harvesting.
ANSWER:
EASY
1224
75.
Chapter 12
accounting
data processing
transportation
product design
ANSWER:
76.
EASY
contract vendor.
lessee.
network organization.
centralized insourcer.
ANSWER:
EASY
Costs forgone when an individual or organization chooses one option over another are
a.
b.
c.
d.
budgeted costs.
sunk costs.
historical costs.
opportunity costs.
ANSWER:
78.
77.
Relevant Costing
EASY
Which of the following costs would not be accounted for in a companys recordkeeping
system?
a.
b.
c.
d.
an unexpired cost
an expired cost
a product cost
an opportunity cost
ANSWER:
EASY
Chapter 12
Relevant Costing
1225
SHORT ANSWER/PROBLEMS
1.
2.
3.
4.
1226
5.
Chapter 12
Relevant Costing
Under what circumstances is the sum of variable production and selling costs the
appropriate minimum price for special orders?
ANSWER:
Variable costs would serve as the bottom price for a special order only if
the special order could be produced on production capacity that would otherwise be idle.
Whenever presently employed capacity is partially or wholly surrendered to produce a
special order, the special order price would be based on both variable costs and the profit
sacrificed on the best alternative use of the capacity.
MEDIUM
6.
Why are fixed costs generally more relevant in long-run decisions than short-run
decisions?
ANSWER:
In the long run, all costs are relevant. In the short run, many costs that
apply to the existing production technology are sunk. In particular, depreciation charges
and lease payments on long-term assets are unavoidable. In the long run, these assets are
replaced and, thus their associated costs are relevant in the replacement decision.
MEDIUM
Chapter 12
Relevant Costing
1227
$1.10
0.40
0.30
0.60
0.10
0
Billy defines direct material costs as seed, fertilizer, water, and other chemicals. The variable
overhead costs represent maintenance and repair costs of machinery. The fixed overhead costs are
completely comprised of depreciation expense on machinery and real estate taxes.
7.
Assume that the current date is March 15. On this date, Farmer Billy must make a decision
as to whether he is financially better off to plant his farm to corn or leave his land idle (no
income is derived from idle land). Corn prices have been severely depressed in recent
years and Farmer Billys best guess is that corn prices will be around $2.00 per bushel at
the time his crop is ready for harvest. Should Billy plant corn or leave his land idle?
Explain.
ANSWER:
Billy should make his decision by comparing the incremental income from
planting the corn crop to the incremental expenses that would be incurred to grow,
harvest, and market the crop. The incremental revenue is simply the $2.00 per bushel and
the incremental costs are all variable costs ($1.10 + $0.40 + $0.30 + $0.10 = $1.90).
Based on this comparison, Farmer Billy would be $13 per acre better off to plant than to
let his land remain idle.
MEDIUM
1228
8.
Chapter 12
Relevant Costing
Assume for this question only that Billy decided to plant the corn. It is now harvest time
and Billys actual costs are the same as those listed previously. A local oil refiner has
approached Billy about converting his crop to grain alcohol (used to make gasohol) rather
than selling his grain to the local grain elevator. If Billy converts the grain to alcohol, he
will incur additional costs of $0.60 per bushel and he will be able to sell his crop to the oil
refiner for the equivalent of $2.50 per bushel. Otherwise, Billy can sell his corn crop to the
local grain elevator for $1.85 per bushel. If Billy elects to sell the grain to the refinery, he
will not incur the variable selling costs. What should Billy do? Support your answer with
calculations.
ANSWER:
Billys alternatives are to sell the corn as a grain or as alcohol. This decision
can be made by comparing the incremental costs to convert the grain to alcohol to the
increase in price he can receive for marketing the crop as alcohol rather than grain. By
converting the crop to alcohol, Billy increases his total revenue by $0.75 per bushel ($2.60
$1.85) and he incurs additional costs of $0.50 ($0.60 for the additional processing, less
the $0.10 savings on the variable grain marketing costs). Thus, by converting the grain to
alcohol, Billy could increase his net income by $0.25 per bushel.
MEDIUM
9.
Assume that the current date is March 15. On this date, Farmer Billy must make a decision
as to whether he is financially better off to plant his farm to corn, leave his land idle (no
income is derived from idle land), or rent his land to another farmer for $50 per acre. Corn
prices have been severely depressed in recent years and Farmer Billys best guess is that
corn prices will be around $2.00 per bushel at the time his crop is ready for harvest. What
should Billy do? Show calculations.
ANSWER:
It has already been determined (answer to #80) that planting corn is
preferred to leaving the land idle (by $13 per acre). By renting the land, Farmer Billy is
even better off. Under the rental alternative, Farmer Billy is $37 per acre better off than if
he plants corn ($50 $13). By renting the land, Billy avoids all costs except the fixed
production costs ($0.60 per bushel or $78 per acre).
MEDIUM
Chapter 12
10.
Relevant Costing
1229
Lisa and Yvette make and sell the Kitchen Mystic, a wall hanging depicting a witch. The
Kitchen Mystics are sold at specialty shops for $50 each. The capacity of the plant is
15,000 Mystics per year. Costs to manufacture and sell each wall hanging are as follows:
Direct material
Direct labor
Variable overhead
Fixed overhead
Variable selling expenses
$ 5.00
6.00
8.00
10.00
2.50
Lisa and Yvette have been approached by an English company about purchasing 2,500
Mystics. The company is currently making and selling 15,000 per year. The English
company wants to attach its own label, which increases costs by $.50 each. No selling
expenses would be incurred on this order. Lisa and Yvette believe that they must make an
additional $1 on each wall hanging to accept this offer.
a.
b.
What is the opportunity cost per unit of selling to the English organization?
What is the minimum selling price that should be set?
ANSWER:
a.
Opportunity cost = Selling price minus total variable costs $50 ($5 + $6 + $8 +
$2.50) = $28.50
b.
MEDIUM
$ 5.50
6.00
8.00
10.00
0
18.50
1.00
$49.00
1230
11.
Chapter 12
Relevant Costing
Tiny Tims Accounting Service provides two types of services: audit and tax. All company
personnel can perform either service. In efforts to market its services, Tiny Tims relies on
radio and billboards for advertising. Information on Tiny Tims projected operations for
2001 follows:
Revenue per billable hour
Variable cost of professional labor
Material cost per billable hour
Allocated fixed costs per year
Projected billable hours for 2001
a.
b.
Audit
35
25
2
100,000
14,000
Taxes
30
20
3
200,000
10,000
ANSWER:
a.
Revenue:
14,000 $35
10,000 $30
Variable Costs:
Labor:
14,000 $25
10,000 $20
Material:
14,000 $2
10,000 $3
Contribution margin
Fixed costs
Profit (loss)
b.
Audit
Tax
Total
$ 300,000
$ 490,000
300,000
$490,000
(350,000)
(200,000)
(350,000)
(200,000)
(30,000 )
$ 70,000
(200,000 )
$(130,000 )
(28,000)
(30,000)
$ 182,000
(300,000 )
$(118,000)
(28,000)
$112,000
(100,000 )
$ 12,000
MEDIUM
Chapter 12
12.
Relevant Costing
1231
Timothy Warren operates a woodworking shop that makes tables and chairs. He has 25
employees working 40 hours per week, and he has 750 hours per week available in
machine time. Timothy knows that he must make at least four chairs for every table. He
has also determined the following additional requirements:
Table
Chair
Labor
hours
5
3
Machine
hours
2
1
Contribution
margin
$18
4
Write the object function and constraints for the above problem.
ANSWER:
Objective function: Max CM--> 18X + 4Y
Subject to:
4X Y > 0
5X + 3Y 1,000
2X + Y 750
X = # of tables
Y = # of chairs
13.
1232
14.
Chapter 12
Relevant Costing
The management of Smith Industries has been evaluating whether the company should
continue manufacturing a component or buy it from an outside supplier. A $100 cost per
component was determined as follows:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$ 15
40
10
35
$100
Smith Industries uses 4,000 components per year. After Jones Corp. submitted a bid of
$80 per component, some members of management felt they could reduce costs by buying
from outside and discontinuing production of the component. If the component is
obtained from Jones Corp., Smiths unused production facilities could be leased to another
company for $50,000 per year.
Required:
a.
Determine the maximum amount per unit Smith could pay an outside supplier.
b.
Indicate if the company should make or buy the component and the total dollar
difference in favor of that alternative.
c.
Assume the company could eliminate one production supervisor with a salary of
$30,000 if the component is purchased from an outside supplier. Indicate if the
company should make or buy the component and the total dollar difference in
favor of that alternative.
ANSWER:
a.
b.
c.
MEDIUM
Chapter 12
15.
Relevant Costing
1233
Brown Corp is working at full production capacity producing 10,000 units of a unique
product, XYZ. Manufacturing costs per unit for XYZ follow:
Direct material
Direct manufacturing labor
Manufacturing overhead
$ 2
3
5
$10
The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed
costs of $30,000 (at full capacity of 10,000 units). The non-manufacturing costs, all
variable, are $4 per unit, and the selling price is $20 per unit. A customer, the Miami Co.,
has asked Brown to produce 2,000 units of a modification of XYZ to be called ABC.
ABC would require the same manufacturing processes as XYZ and the Miami Co. has
offered to share equally the non-manufacturing costs with Brown. ABC will sell at $15
per unit.
Required:
a.
What is the opportunity cost to Brown of producing the 2,000 units of ABC
(assume that no overtime is worked)?
b.
The Jones Co. has offered to produce 2,000 units of XYZ for Brown, so Brown
can accept the Miami offer. Jones would charge Brown $14 per unit for the XYZ.
Should Brown accept the Jones offer?
c.
Suppose Brown had been working at less than full capacity producing 8,000 units
of XYZ at the time the ABC offer was made. What is the minimum price Brown
should accept for ABC under these conditions (ignoring the $15 price mentioned
previously)?
1234
Chapter 12
Relevant Costing
ANSWER:
a.
XYZ
SP
VC
= CM
$ 20
(11)
$ 9
($2 + $3 + $2 + $4)
2,000 units =
$18,000
ABC
SP
VC
= CM
$15
(9)
$ 6
($2 + $3 + $2 + $2)
2,000 units =
12,000
Opportunity cost
$ 6,000
b.
Make ($15 $14) = $1 2,000 units = $2,000 without giving up any current production
= DO IT.
c.
The variable cost to make and sell = $11 ($2 + $3 + $2 + $4) would be the minimum. Any
price over $11 would increase the contribution margin.
MEDIUM
Chapter 12
16.
Relevant Costing
1235
The Davis Company normally produces 150,000 units of AB per year. Due to an
economic downturn, the company has some idle capacity. AB sells for $15 per unit.
The firms production, marketing, and administration costs at its normal capacity are:
Direct material
Direct labor
Variable overhead
Fixed overhead
($450,000/150,000 units)
Variable marketing costs
Fixed marketing and administrative costs
($210,000/150,000 units)
Total
Per Unit
$1.00
2.00
1.50
3.00
1.05
1.40
$9.95
Required:
a.
Compute the firms operating income before income taxes if the firm produced and
sold 110,000 units in 2001.
b.
For 2002, the firm expects to sell the same number of units as it sold in 2001.
However, in a trade newspaper, the firm noticed an invitation to bid on selling AB
to a state government. There are no marketing costs associated with the order if
Davis is awarded the contract. The company wishes to prepare a bid for 40,000
units at its full manufacturing cost plus $ 0.25 per unit. How much should it bid?
If Davis is successful at getting the contract, what would be its effect on operating
income?
c.
Assume that the company is awarded the contract on January 2, 2002, and in
addition it also receives an order from a foreign vendor for 40,000 units at the
regular price of $15 per unit. The foreign shipment will require the firm to incur its
normal marketing costs. The government contract contains a 10-day escape clause
(i.e., the firm can reject the contract within 10 days without any penalty). If the
firm accepts the government contract, overtime pay at 1 times the straight time
rate will be paid on the 40,000 units. In addition, fixed overhead will increase by
$60,000 and variable overhead will behave in its normal pattern. The company has
the capacity to product both orders. Decide the following:
1.
Should the firm accept the foreign offer? Show the effect on operating
income of accepting the order.
2.
Assuming the foreign order is accepted, should the firm accept the
government order? Show the effect on operating income of accepting the
government order.
1236
Chapter 12
Relevant Costing
ANSWER:
a.
b.
c.
$1,650,000
(610,500 )
$1,039,500
(660,000 )
$ 379,500
$7.75
(4.50 )
$3.25 40,000 units = $130,000 increase in operating income.
1.
SP
$15.00
VC
(6.55 ) ($1 + $3 + $1.50 + $1.05)
CM
$ 8.45
40,000 =
$338,000
FC
(60,000 )
Increase in Operating Income
$278,000
2.
Both orders can be accepted even if the increased costs of $40,000 for labor and
$60,000 for fixed overhead are assigned to the government order.
DIFFICULT